In 2009, Sharon Owen began working at Bristol Care, which operates residential care facilities for the elderly. When she was hired, Owen signed a mandatory arbitration agreement, which mandated that all legal claims—including those for violations of federal statutes such as the FLSA—would be resolved by binding arbitration.

The agreement also contained a waiver that prevented employees from arbitrating claims on behalf of a class, although they retained the right to file complaints with government agencies.

Owen put the class action waiver to the test when she sued Bristol in September 2011, claiming that the company misclassified her and other administrators as exempt employees under the FLSA to avoid paying overtime. Bristol tried to compel arbitration based on the employment contract and Section 2 of the Federal Arbitration Act (FAA), which holds that contractual arbitration provisions are valid, but a district court ruled against the company, finding that the class action waiver invalidated the entire arbitration agreement.

On appeal, the 8th Circuit reversed the district court’s decision and granted Bristol’s motion to compel arbitration, despite the NLRB’s Jan. 6, 2012 ruling in D.R. Horton Inc., which struck down class action waivers under the National Labor Relations Act (NLRA).

“[The 8th Circuit] clearly comes out and says that courts are the final arbiter of what the FAA says, not administrative agencies,” says J.P. Duffy, a partner in DLA Piper’s international arbitration group.

Congressional Command

In D.R. Horton, another FLSA case, the NLRB ruled that a company had violated Section 7 of the NLRA by requiring its employees to sign an arbitration agreement and class action waiver.

The district court in Owen found that the NLRB’s ruling barred class action waivers in FLSA cases because the statute provides for the right to bring class action suits.

Writing for the 8th Circuit, Judge Raymond Gruender disagreed with this interpretation, citing a 1987 Supreme Court ruling, Shearson/American Express Inc. v. McMahon, which found that Section 2 of the FAA compels courts to enforce arbitration agreements in the absence of another law containing a “contrary congressional command.” Nothing suggests that Congress intended the FLSA or NLRA to override the FAA, the 8th Circuit ruled on Jan. 7.

Gruender also noted that, regardless of the substance of the NLRB’s ruling, the 8th Circuit was not obligated to defer to it, and that, in fact, “nearly all of the district courts to consider the decision have declined to follow it.”

Plentiful Precedent

Instead, the 8th Circuit relied on “more than two decades of pro-arbitration Supreme Court precedent,” including the high court’s rulings in Shearson and Gilmer v. Interstate/Johnson Lane Corp. in 1991.

The district court had declined to consider the Supreme Court’s 2011 decision upholding class arbitration waivers in AT&T Mobility v. Concepcion, arguing that it applied only to consumer contracts. But Gruender pointed out that Gilmer dealt with the employment sphere, “[foreclosing] the argument that Supreme Court precedent upholding the enforceability of class waivers is limited to the consumer context.”

Numerous courts are currently considering the validity of arbitration agreements in both employment and consumer contracts (see “Additional Implications,” p. 54), and John Allgood, of counsel at Ford & Harrison, anticipates that most will enforce such provisions.

“[The NLRB] just took a sledgehammer approach in announcing that any class action waiver made the entire arbitration provision unenforceable,” he says. “[The courts] are not likely to allow a federal agency … to undermine the right to contract for arbitration, so long as the standards in Gilmer are observed.”

One such standard—and a key factor in the 8th Circuit’s decision— is that in both Gilmer and Owen, employees had the right to pursue their grievances through alternate channels. Employers should include similar provisions in their own arbitration agreements, Allgood says.

“[In an enforceable employment agreement] the employee has the opportunity to file with the Department of Labor, with the Equal Employment Opportunity Commission, with the NLRB,” he says. “If that is in the arbitration agreement then, in my opinion, that makes the agreement, including the class action waiver, enforceable.”